The extent to which the deficit is deepening fissures between Labour and the Lib Dem leadership will be exposed tomorrow when Nick Clegg claims the shortfall should not be seen as a catastrophe for progressive politics but a chance for renewal and for refocusing the role of the state.

The deputy prime minister claims that Labour, under Ed Miliband's leadership, is becoming the new conservative group of British politics, wedded to outdated ideas and stuck in an anti-pluralist rut.

Labour, he says, is in danger of turning high marginal tax rates, a large state, and "snapshots of income inequality" into shibboleths. For old progressives, personified by Miliband, "reducing snapshot income inequality is the ultimate goal", he maintains, and for new progressives it is "reducing the barriers to mobility".

Clegg will seek to mark out these modern day definitions of the century-old divisions between old and new progressives in the Hugo Young lecture tomorrow evening. In the lecture, organised by the Guardian, he will say the coalition is currently defined almost exclusively by what it is doing to reduce the deficit, but he claims that from the "fog of war" the building blocks of a new, more mobile and open, society can start to be seen.

He is set to concede that the differing responses to the deficit are pulling Labour and Lib Dems apart, asserting that "the economic backdrop is opening up a real divide in progressive politics, a divide between old progressives, who emphasise the power of the central state, and new progressives, who focus on the power of citizens". He will say: "For new progressives, the test is not the size of the state, it is the relationship between the state and the citizen. There are those who see the crisis in public finances as a catastrophe for progressive politics, who believe that cutting the deficit means cutting progressive aspirations. In fact, it provides an opportunity for renewal. Is it possible to be progressive when money is tight?"

He claims "the need for fiscal discipline is sharpening the choices we face – it is forcing us to be clearer about what it really means to be progressive. With less money, we need more focus".

Clegg argues that the new progressives believe the goal of public policy is to improve social mobility and not just improve incomes so that some exceed the government definition of child poverty.

His remarks reflect the degree to which he appears to be looking for government commissioned reports, from Frank Field on child poverty and from Graham Allen on early intervention, to develop a fresh analysis of how to lift people out of poverty.

Labour made its central anti-poverty objective, to cut the number of households living below 60% of median income, a measure of inequality.

Clegg says he does not oppose such targets but adds: "The weakness of the old progressive approach is that it leads to huge amounts of resources being devoted to changing the financial position of these households by fairly small amounts – just enough, in many cases, to get them above the line. But poverty plus a pound does not represent fairness. It represents an approach to fairness dominated by the power of central state to shift money around rather than shift life chances."

Some Liberal Democrats regret the degree to which the coalition made child tax credit a priority, saying the money would have been better spent elsewhere.

Clegg says he favours a multi-dimensional approach to poverty. "Poverty is also about quality of the local school, access to good health services, fear of crime."

He also attacks Miliband for suggesting in his Guardian interview published on Monday that a 50p tax rate on the rich was necessary to lessen inequality. "Old progressives are obsessed with marginal tax rates. They focus on one aspect of the tax system … rather than [look] at the overall system. They make a shibboleth of a single tax rate and allow symbolism to trump real reform. By contrast, new progressives want to reform the tax base fundamentally, towards taxation of unearned wealth and pollution, rather than people."

He claims the old left defines being progressive as favouring more state spending but "the question is not how much the state is spending, it is how it spends and what it spends it on".

Some will see his remarks as a sign that the road back to a rapprochement with Labour is closed – but that is denied by his officials.